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banking case studies – direct debit guarantee
27/1
bank pays out under direct debit that customer had cancelled
Mrs B enrolled her son at a fee-paying school and signed
a direct debit form, authorising the school to claim the
school fees direct from her current account. But Mrs B removed
her son from the school only a few weeks after he had started
there.
She cancelled the direct debit and made separate arrangements
to pay the school what she considered to be due. However,
this was less than the school thought it was owed. A couple
of months later, the school claimed an extra term’s
fees under the direct debit, because it said that Mrs B
had been required to give a
term’s notice. When Mrs B’s bank paid the sum
requested, even though she had cancelled the direct debit,
Mrs B complained and asked the bank to pay the money back.
The bank argued that she was not entitled to have her money
back. It said she had not suffered a loss as a result of
its making the payment because she owed the school the money
in any event.
complaint upheld
It was irrelevant whether Mrs B owed money to the school.
What was relevant was that her bank had paid out
under a direct debit that she had cancelled. So, under the
direct debit guarantee, once Mrs B notified the bank of
its error, it should have refunded the money straight away.
It wasn’t for the bank to decide whether or not Mrs
B owed the money to the school.
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27/2
bank pays out after direct debit cancelled – direct
debit guarantee not applicable
Mr F set up a variable direct debit for payments to his
stockbroker. He generally placed an order for shares around
the middle of each month and the stockbroker collected the
payment through the direct debit at the end of the month.
Eventually he decided to end this arrangement and cancelled
the direct debit mandate. But the very next day, the stockbroker
requested £50,000 via the direct debit and the bank
paid. Several months after this, Mr F complained to the
bank and claimed a refund of the money under the direct
debit guarantee.
The bank refused, saying that to repay Mr F would result
in his ‘unjust enrichment’. This was because he
already had the shares to which the payment related, even
though their value had since gone down.
complaint rejected
In assessing this case, we looked at the terms of the direct
debit guarantee. Customers can cancel a direct debit at
any time by writing to their bank. Mr F had written
to his bank and cancelled the direct debit the day before
the payment was made.
So if the bank had paid the stockbroker under the direct
debit, it must have been in error because he had cancelled
the direct debit. And if the bank makes a payment in error
the customer is entitled to a full and immediate refund.
But in this case we found that the stockbroker had Mr F’s
authority to debit his account independently of the direct
debit. It was in the terms and conditions of his contract
with the stockbroker that the costs of each deal would be
taken from his nominated account. So that gave the bank
authority to release money from his account to the stockbroker,
whether or not this was done via a direct debit, and we
did not uphold the complaint.
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27/3
bank’s failure to transfer direct debits correctly
to new accounts – customer does not notice for ten
years – complaint outside time limits
For some years, Mr and Mrs C had a joint bank account, out
of which they paid a number of direct debits. But eventually
they decided to set up their own separate accounts and they
divided their direct debits between these two accounts.
Mrs C frequently shopped at a large department store for
which she had a store card. The direct debit for this card
should have been transferred to her new account but, in
error, the bank transferred it to her husband’s account.
Mr C remained unaware of this for ten years until, after
falling out with the bank over another matter, he took a
close look at the direct debits on his account. He then
found that he had unwittingly been funding all his wife’s
spending at the store for the past ten years.
Mr and Mrs C both blamed the bank for the error and Mr C
complained to the firm, saying that under the terms of the
direct debit guarantee it was responsible. When the firm
rejected the complaint, Mr C came to us.
complaint rejected
We were unable to deal with the complaint because it was
outside our time limits. For us to consider a complaint,
the event complained about must have happened within six
years, or within three years from when the customer ought
reasonably to have been aware that there was cause for complaint.
In this instance, the bank’s failure to transfer the
direct debit correctly had happened more than six years
ago.
But even if this had not been the case, we would not have
upheld the complaint. The payments had been coming out of
Mr C’s account for many years and he received statements
every month, so he had ample opportunity to spot the mistake
and notify the bank. In the circumstances, we did not think
it reasonable to require the firm to refund the payments
as he had requested.
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27/4
bank pays out after fraudulent direct debits set up –
customer claims refund plus payment for consequential losses
When withdrawing money from his account via a cash machine,
Mr M was very surprised to find he had become overdrawn.
He checked his bank statement and found that two direct
debits had been set up on his account without his knowledge.
The bank looked into this and found that a fraudster had
somehow obtained Mr M’s bank details and set up direct
debits to repay a car loan and take out car insurance. The
firms that were taking the payments for the loan and the
insurance were both members of AUDDIS (Automated Direct
Debit Instruction Service). This meant they could establish
direct debit instructions without needing to send paper
instructions to Mr M’s bank.
In the past, a bank would always have received instructions
to set up a direct debit in the form of a document signed
by the customer. But increasingly, firms are carrying out
these transactions electronically. This saves time and helps
reduce costs but makes it less easy to spot a fraudulent
instruction.
Although Mr M’s account number and the bank’s
sort code were correct, the fraudster had given an incorrect
account name. This should have alerted the firm that something
was not quite right and it should have made further enquiries
before proceeding.
The bank readily accepted that, in accordance with the direct
debit guarantee, it should refund the direct debits incorrectly
paid. But it refused to compensate Mr M for the additional
losses he claimed to have suffered. He had a savings account
with the firm, which fed his current account. He wanted
to claim for loss of interest on the money that would have
remained in his savings account if the firm had not paid
out via the fraudulent direct debits.
He also said that since his earnings came from abroad, the
firm’s error meant he had to make extra transfers from
his foreign bank account to keep his account with the firm
in credit. The unfavourable exchange rate and the foreign
bank’s charges meant that these transfers were costly.
When the firm to refused to compensate Mr M for these additional
losses, he came to us.
complaint settled
Mr M argued that the bank should cover these losses under
the direct debit guarantee. He said its purpose was to protect
account holders who had set up direct debits from mistakes
in the way they were operated.
In this case, as Mr M had not authorised a direct debit,
the direct debit guarantee was not strictly relevant. However,
after we discussed the position with the firm, it offered
Mr M a goodwill payment to cover his consequential losses.
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from
the Financial Ombudsman Service